John Buckingham's Al Frank Fund has put shareholders through some ups and downs en route to becoming the No. 1 stock mutual fund in its category. This year has offered both.
Since the end of December, the $250 million fund rose as much as 8.8 percent and then was down as much as 3.9 percent, hurt by holdings in companies such as Concord Camera Corp. and Huffy Corp. For the year, it's up 0.8 percent and remains the best-performing "value" fund of the past five years, rising at an annual rate of 21 percent, according to data compiled by Bloomberg.
"We try to zig when everyone else zags," Buckingham said in a telephone interview. Buckingham works in Laguna Beach, Calif., about 50 miles south of Los Angeles.
Buckingham holds shares of more than 400 companies including Microsoft Corp., the world's third-largest company, with a market value of $282 billion, and Traffix Inc., an Internet direct marketer worth $86 million.
Traffix, of Pearl River, N.Y., is the fund's largest holding. The company reported net income for 19 of the past 21 quarters, had $2.97 a share of cash available at the end of February, and has a dividend yield of almost 5 percent, Buckingham said. The stock closed Friday at $6.94.
For Buckingham, Traffix is a quintessential value stock. "You get this giant dividend that comes with the safety of a good balance sheet and a profitable business," he said. Value fund managers typically look for stocks they consider cheap relative to earnings, book value, dividends and other financial yardsticks.
Buckingham said that buying stocks other investors don't like, as well as purchasing shares of smaller companies and computer-related companies, has made the fund's returns volatile.
In an annual report sent to investors, Buckingham said the fund rose 78 percent last year because of "all of the lousy stocks we bought in 2002," when the fund fell 26 percent.
Buckingham said about 30 percent of the stocks he buys for the fund turn out to be mistakes. One loser was Mirant Corp., an operator of 22 power plants that filed the biggest bankruptcy case of last year. The fund still owns the shares. They aren't worth selling with the stock trading at about 27 cents, he said.
Buckingham, 38, has managed the Al Frank Fund since it opened in 1998. Jessica Chiaverini, who joined the company in 2000, has been co-manager since Al Frank's death two years ago.
Buckingham grew up in Minnesota and has spent his entire career at Al Frank Asset Management, joining the firm in 1987 when he was in his final year at the University of Southern California.
"I've been a busboy and a portfolio manager," Buckingham said of his work experience.
Frank was the author of the Prudent Speculator, a monthly newsletter started in 1977 to identify cheap stocks. The publication's stock picks produced annualized returns of 18 percent during the past 20 years, the highest of 25 newsletters tracked by Hulbert Financial Digest.
In addition to managing the Al Frank Fund, Buckingham has contributed to the Prudent Speculator, which he now edits, since 1990. It has about 10,000 subscribers who pay $295 a year for the newsletter and weekly e-mail updates. Buckingham said he has $40,000 of his own money in the Al Frank Fund and he plans to buy more shares by the end of June.
Buckingham also owns shares of Keynote Systems Inc. and Orbit International Corp., two stocks that he is recommending to newsletter readers. Keynote Systems, a provider of services used to evaluate Internet sites, and Orbit International, a maker of electrical components for the military, also are held by the Al Frank Fund.
Buckingham said his largest personal investment is a stake of about 20 percent in Al Frank Asset Management. The rest of the firm is owned by 24 other investors. The Al Frank Fund isn't cheap. It charges $16 for every $1,000 invested, compared with an industry average of $12.
In March, Buckingham bought 30,000 shares of Microsoft for the Al Frank Fund. He purchased the stock after watching it tumble more than 50 percent from its 1999 peak. Now Microsoft stock trades at 21 times this fiscal year's earnings estimates and the company had $5.23 a share in cash and marketable securities at the end of the first quarter.
It was "trading below the market multiple, and $56 billion of cash provides significant downside protection," he said.
Buckingham also likes shares of home builders Beazer Homes USA Inc. and D.R. Horton Inc., which are among the fund's 15 biggest investments.
Beazer's profit will grow 15 percent a year and its stock is cheap, trading at seven times what the Atlanta-based company earned during the past four quarters, he said.
D.R. Horton of Arlington, Tex., has recorded earnings and revenue increases for 26 straight years, and net income will continue to increase at an annual pace of 15 percent, he said.
In addition to buying stocks that look cheap, Buckingham said he tries to be patient. He holds stocks for about six years on average. That compares with an industry average of less than two years, according to the Investment Company Institute in Washington.
The fund also tries to encourage shareholders to think long term. Since 2002, the fund has charged a 2 percent fee on shares bought and sold within 60 days. Last year, an investor put about $4 million into the fund and sold it 45 days later. A fee of $80,000 was charged and the proceeds went to fund holders.